How do moral hazards affect insurance risk?

How do moral hazards affect insurance risk?

• A. They minimize the risk passed to the insurer
• B. They increase the likelihood of riskier behavior due to the reassurance provided by insurance coverage
• C. They have no impact on underwriting processes
• D. They reduce overall claim amounts

Answer: (B)

Moral hazards refer to the phenomenon where individuals alter their behavior when they are insulated from risk, particularly in the context of insurance. When people have insurance coverage, they may feel a sense of security that leads to riskier behavior, as they believe they are less likely to bear the full consequences of their actions. This increased likelihood of engaging in riskier behavior is a direct result of the reassurance that insurance provides, making option B the correct choice. For instance, a person with comprehensive car insurance may be less careful in parking their car, thinking that any potential damage would be covered by their policy. Such changes in behavior can subsequently raise the overall risk profile for the insurer, as the frequency and severity of claims may increase. This aspect of moral hazard highlights the need for insurers to carefully assess risk and implement measures, such as deductibles or policy exclusions, to counteract the effects of moral hazards and mitigate their impact on underwriting and overall loss experience.

Moral hazards refer to the phenomenon where individuals alter their behavior when they are insulated from risk, particularly in the context of insurance. When people have insurance coverage, they may feel a sense of security that leads to riskier behavior, as they believe they are less likely to bear the full consequences of their actions. This increased likelihood of engaging in riskier behavior is a direct result of the reassurance that insurance provides, making option B the correct choice.

For instance, a person with comprehensive car insurance may be less careful in parking their car, thinking that any potential damage would be covered by their policy. Such changes in behavior can subsequently raise the overall risk profile for the insurer, as the frequency and severity of claims may increase. This aspect of moral hazard highlights the need for insurers to carefully assess risk and implement measures, such as deductibles or policy exclusions, to counteract the effects of moral hazards and mitigate their impact on underwriting and overall loss experience.